Return on Investment: Continuous Improvement Killer?

Posted on March 19, 2012

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Do you measure the Return on Investment (ROI) for your continuous improvement projects? Should you even try? This post explores my thoughts on this hotly debated topic.

AlixPartners LP, a Chicago based consulting company recently suggested that:

whilst 85% of companies in their study were undertaking a form of process improvement, a surprising number had no measurable ROI to determine if it was working or not.

So this begs the question, do you or should you try to measure the ROI on your continuous improvement projects? This is my take: ROI is often kicked around by Leaders demanding to know how much a certain improvement project will or won’t save in the short-term. Sometimes the short-term effects of Lean often have negative financial consequences. This means that ROI is often a leads into to a go/no-go decision on a project but I’m not sure if it’s the best measure? For example, a project may generate a low ROI figure but its dollar effect may be large and, of course, the opposite applies too. I personally think that ROI is a more backwards looking measure as opposed to forwards looking. After the event you can estimate what the ROI was but it’s very difficult to forecast what it will be. Just to highlight what I mean, if you break down ROI into its two component parts:

  • Return – relies on prediction, its long-term and difficult to calculate
  • Investment – involves much less prediction, its short-term and easier to calculate

Sometimes improvement activities are small, incremental events. Spending time trying to work out the exact ROI isn’t worth the effort, the time or the resource. Focus on the process and the financial results will follow.

What I think it boils down to a shift of focus from asking, “What’s the ROI on this project?” to, “What is the performance we need and how can we reach it?”

However, saying all this ROI IS an important metric, especially if you consider it in conjunction with other perhaps non-financial measures. For example factoring in the improvement to employee morale or a lower turnover rate which results from smaller kaizen events. I’d suggest involving Lean Accountants, people who understand real cost accounting; they will help you to break down the costs and benefits for any project.

How To Calculate Net Profit And Return on Investment:

What’s your opinion? Is ROI an essential pre-requisite before you kick off an improvement activity? Leave a comment below:

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Posted in: Lean